Commentaries

We’re going to try something a little bit different this year. Here, we will attempt to take a look back at what by now is a very important but “old” topic of discussion, and also address the current and future aspects of what certainly is a significant yet “new” development. We refer respectively to the macro topic of China and the micro phenomenon called Bitcoin.

We have been discussing China in this space for a bit over ten years now, and in some ways nothing has changed. One camp believes China will have a long-term successful economic path, while the other maintains that China’s well-planned, multi-decade move toward its current position and having the world’s second largest GDP (number one in Purchasing Power Parity (PPP)) apparently never happened, and if it did it will crash yesterday. As with politics, people oftentimes ignore actual data and occurrences or they try to massage data to fit a pre-conceived narrative. We will continue to strive and do our best to provide as unbiased and objective analysis as is possible whenever the human condition is involved.

First, let us begin with what is arguably the number one topic in finance circles today: Bitcoin. We have probably gotten more questions about this single subject in the last few months than all other matters combined. It is likely driven by the media as much as anything else, because it is certainly not due to practical relevance to the average person’s daily life. Let us state right from the beginning that Bitcoin is not a currency, “crypto-” or otherwise. That is simply a marketing term to make it appear more palatable as a serious object of consideration. It is not recognized by a single government, nor traded on a single currency exchange. Governments typically try to control inflation in currency; 2% is often cited as an optimal goal. Bitcoin soared 1,400% last year alone!

There is absolutely nothing to guarantee its value (not gold; not the ‘full-faith and credit’). It is “bought” and “sold” digitally on the web (or dark web), with no physical possession or transfer ever taking place. Trades are also completely anonymous. There is no proof of ownership and digital “wallets” are regularly caked into and stolen, with absolutely no recourse to the victim. Unlike other speculative collectibles (art, antiques, etc.), there is no intrinsic value. Currently it appears to be the domain almost exclusively of speculators and various nefarious actors, including terrorists and drug cartels.

While there certainly has been and will continue to be an expansion of payment methods, it is unlikely that the actual currency will change. Even if so, it would not change to a currency that is so aggressively volatile. The first thing we say when people ask us for our opinion on Bitcoin is one simple word: tulips.

Tulipmania is generally regarded as the world’s first financial bubble. In short, tulips had been recently introduced to the Netherlands in the early 17th century. Through novelty and scarcity, prices began to rise. Things quickly became so out of hand that people began to speculate in them, believing that the price would only continue to rise. From a low price of trading at the value of an onion, at peak-mania a single tulip bulb traded for the equivalent price of ten-times the salary of a skilled tradesman. People sold entire estates, acres of land, for a single bulb. As you may have guessed, this was not a good trade.

Our advice regarding Bitcoin (or any other speculative gamble), is to only spend as much purchasing it as you are comfortable losing. If you are not comfortable losing anything, just remember the old gambling axiom: if you find yourself in a poker game with strangers and you can't figure out who the mark is… it’s you.

Chinese Again?

As our readers know, we believe that since the investable market capitalization outside of the US is well over half of world total, one must have a significant exposure to that, especially since these countries are growing at a faster rate. If one were to have walked away from the US market at the dawn of the 20th century, out of xenophobia or fear of upcoming recessions, depressions or world wars, one would have missed the long-term overall greatest economic growth story ever. The 1930’s were one of the worst decades ever. Would you walk away from the 20th century because of it? We believe that turning your back on developing economies (such as China and India) at this point would be turning your back on the next several decades of growth.

Global markets and economies, after a few years of underperformance, have continued the rally that began a couple of years ago, led in no small part by China and China’s fiscal policies and a movement toward reflation. In the middle of 2015 China’s economy was showing signs of stress, attributable in no

small part to a faltering real estate sector and growth in debt. GDP growth was slowing, and some regions registered negative GDP movement on their own. The usual collection of China critics repeated the oft-predicted demise of the Chinese economic growth machine.

By 2016 the Chinese economy was in rebound mode, as the government implemented infrastructure and real estate-based stimulus projects. This also helped emerging markets overall as it pushed up commodity prices. European exporters were peripherally helped by increased demand for heavy equipment. The reliance on debt brought out additional (and rightfully predictable) claims that China was again on the brink of financial collapse. However, China devoted much of last year to addressing systemic risk, curbing its shadow lending industry and shoring up the economy overall.

The simple fact that is often overlooked about an economy like China growing at 6.8% (Q3 estimate for FY 2017), is that it is still growing at two or three times the rate as the US! When we spoke with the CEO of a major international conglomerate, which was in the midst of preparing plans for international expansion, we asked directly about the matter of long-term prospects in China and the answer could not have been clearer. Inge Thulin, President and Chief Executive Officer of Fortune 100 Company 3M answered emphatically: “Even if China is ‘only’ growing at 6%, it’s still twice the rate as the US. That’s where I want to be positioned!”

Speaking of China, the panda bears continue to point out “empty cities.” It is true, they do exist. But it is also true that in any ten-year period, it is not the same cities that are empty. New ones are built as others are filled. Let us put it in another way. If China, in ultra-growth mode, builds 100 cities, is it not likely that they may put 3 or 4 in the wrong spot? We should be rooting for countries like China. It is good for mankind. They are pulling people out of real poverty and misery. They also increase world growth and GDP; they will surely buy more US goods (and $100mm NYC condos…).

Company Highlight

ICICI Bank (IBN) is India’s second largest bank and largest private insurance company. The company is a direct beneficiary to India’s economic growth. Since Mahindra Modi became the Prime Minister of India, their economy has grown at a rate of 6.7% with a slight slow-down in 2017. However, Modi’s promised reforms were easier said than done and took longer than anticipated. Now, with the newly instated state-wide sales tax, it is expected that operating businesses nation-wide will become easier.

Alibaba Group Holding Ltd.’s (BABA) Alibaba Cloud, invested $5 billion for building an Indian data center in Mumbai. It is scheduled to open this month and is an indication that there is high demand for cloud computing services in India. We see this as an approval of Modi from Ma.

ICICI Bank (IBN) had an eventful year. After many years of speculation and talks, a long anticipated partial IPO of ICICI Prudential, its life insurance arm, was finally completed. In addition, it started the process of taking its brokerage division public, which is expected to be completed in the first half of this year. This would value the company at over 200 billion rupees (or $3.1 billion). IPOs in India have raised 750 billion rupees this year, or more than double the previous record that was set in 2010, according to Bloomberg.

Jack Ma basically took the playbook of Warren Buffett’s Berkshire HathawayInc., combined it with those of Google, Amazon and Apple, and in effect accomplished what they did but in a much shorter time frame. Having successful examples to follow certainly helped.